Estimation of technical efficiency in banking industry using stochastic frontier analysis

Considering the fundamental role of banking system in different economies, an efficient banking system has always been regarded by governments; also, establishment of an efficient network of branches is considered as a major strategy to adjust efficiency improvement programmes within a bank. Accordingly, the present paper aimed to calculate the technical efficiency of 128 branches of Tejarat Bank in Isfahan, Iran, during 2007‐2009 through stochastic frontier analysis, Translog production function, and maximum likelihood estimation. The model used in the study was time‐varying in efficiency model developed by Battese and Coelli (1992). The obtained statistical results from data fitness indicate that average technical efficiency of Tejarat Bank branches in Isfahan is 95.36% during studied period; that is, 95.36% of loans payable in full efficiency, assuming the same level of inputs, was paid by Tejarat Bank of Isfahan during a three‐year period (2007‐2008). Moreover, mean technical efficiency of these branches decreased over time.